FASB tentatively decides to narrow the scope of its insurance contracts project
At its meeting today, the FASB tentatively decided to:
- Generally limit the scope of insurance accounting to insurance entities.
- Retain the existing recognition and measurement model for short-duration contracts under U.S. GAAP and make targeted improvements to the disclosure requirements for such contracts.
- Make targeted improvements to the recognition, measurement, and disclosure model for long-duration contracts.
Under the FASB’s June 2013 proposed ASU,1 any entity that issued an insurance contract, as defined, or that purchased a reinsurance contract would have applied the proposed insurance accounting model. On the basis of feedback received from comment letters and the Board’s outreach efforts, a majority of the Board agreed that instead of establishing a contracts-based model that would require the Board to create numerous scope exceptions, it could reduce the proposal’s complexity by retaining the “activity-based” scope of existing U.S. GAAP (i.e., limiting the scope of insurance accounting to insurance entities) and then redeliberating whether certain contracts written by noninsurers should be subject to the same guidance.
In addition, the FASB tentatively decided to focus its future efforts on making targeted improvements to the existing U.S. GAAP insurance accounting model. Factors the Board considered included constituent feedback, implementation costs, and the likelihood that the FASB and IASB would be unable to agree on a converged accounting model. For short-duration contracts, the FASB tentatively decided that its targeted improvements should focus only on disclosure requirements; for long-duration contracts, the targeted improvements will take into account the requirements for recognition, measurement, and disclosure.
Editor’s Note: Collectively, these decisions would result in a U.S. insurance accounting model that would diverge significantly from the insurance accounting model proposed by the IASB. Several FASB members indicated that its targeted improvement efforts could possibly result in a long-duration accounting model similar to the building block approach being pursued by the IASB; however, such an outcome is not the primary objective of such improvements.
The FASB directed its staff to conduct additional research on potential targeted improvements and to analyze the existing long-duration accounting models under U.S. GAAP to identify differences between the models and practice issues raised by financial statement preparers and users.
1 FASB Proposed Accounting Standards Update, Insurance Contracts.